Excerpt from John O. Honnold, Uniform Law for International Sales under the 1980
United Nations Convention, 3rd ed. (1999), pages 363-369. Reproduced with permission of
the publisher, Kluwer Law International, The Hague.

Article 58 addressees these questions: When must the buyer pay for the goods? Must he pay before he receives the goods? Is the seller obliged to surrender the goods before he is paid? How may the goods be exchanged for the price when (as is usual in international sales) the contract calls for carriage of the goods? May the seller require the buyer to pay before the buyer has an opportunity to examine the goods?

Procedures for payment are of concern to the parties and usually are dealt with in the contract; Article 58 provides answers only when the contract is silent (Art. 6). As we shall see, Article 58 is designed to minimize risks for both parties—risk to the seller from delivery before payment and risk to the buyer from payment for defective goods.

"(1) If the buyer is not bound to pay the price at any other specific time, he must pay it when the seller places either the goods or documents controlling their disposition at the buyer’s disposal in accordance with the contract and this Convention. The seller may make such payment a condition for handing over the goods or documents.

"(2) If the contract involves carriage of the goods, the seller may dispatch the goods on terms whereby the goods, or documents controlling their disposition, will not be handed over to the buyer except against payment of the price.

"(3) The buyer is not bound to pay the price until he has had an opportunity to examine the goods, unless the procedures for delivery or [page 363]payment agreed upon by the parties are inconsistent with his having such an opportunity."

Paragraph (1) makes two points: (i) The buyer is not obliged to pay the price until the seller places the goods at the buyer’s disposition; (ii) The seller is not obliged to hand over the goods until the buyer pays the price. In short, goods are to be exchanged for the price.[2]

Paragraph (2) of Article 58 builds on the principle, stated in paragraph (1), that when the contract is silent there is to be a concurrent exchange of goods for the price. When (as in most international sales) the contract calls for carriage of the goods, paragraph (2) authorizes the seller to deliver the goods to the carrier in exchange for a document "controlling [the] disposition" of the goods—usually a bill of lading providing that the goods will only be delivered in exchange for the surrender of the document.[3] Alternatively, under streamlined delivery systems, the carrier (e.g., an air carrier) may collect the price when the buyer receives the goods. (Electronic processes are speeding the transmission of funds and documents. See §331.1, supra, and note 3, below.)

Such an arrangement is common where the seller and the buyer are located in the same State and the cost of shipment is not unusually high.[4] But when the seller delivers in another State following extended and expensive transport the seller runs substantial risk. If the buyer fails to pay, it may be difficult for the seller to redispose of the goods; if payment is made, currency restrictions may block removal of the funds. These considerations have led to the common arrangement in which the seller will not deliver the goods to the carrier until the buyer has arranged for the issuance (or confirmation) of a letter of credit by a bank that is near the seller; the seller is then assured of payment by a local bank when the seller presents the documents specified in the letter of credit.[5][page 365]

In Example 58A, may Seller require Buyer to arrange for the issuance (or confirmation) of a letter of credit by a bank near Seller, so that the documentary exchange may take place at that point? The Convention does not refer to the use of letters of credit. However, as we have seen, Article 57(1)(a) provides that the buyer must pay the price to the seller "at the seller’s place of business." Arranging for a documentary exchange in the seller’s locale would usually be the cheapest and safest way for the buyer to exchange funds for the goods in the vicinity of the seller’s place of business (Art. 57(1)(a)).[6] However, special arrangements may be necessary when it is important for the buyer to examine the goods before he pays; these will be considered under (3), below.

Paragraph (3) states the general rule that the buyer "is not bound to pay the price until he has had an opportunity to examine the goods." When the transaction calls for the buyer to send for the goods (cf. a sale "ex works") or when the seller delivers the goods in its own trucks, inspection before payment may be quite feasible. When the seller dispatches the goods by carrier and provides for a documentary exchange at destination, the seller may delay the presentation of the documents until after the goods arrived and are unloaded, and may instruct the carrier to allow the buyer to inspect the goods before the buyer has received the bill of lading. However, for reasons that have been outlined above at §337, it may be risky for the seller to defer the time for payment until the goods reach the buyer. The Convention does not require the seller to run these risks. Article 57(1)(a), supra, regulates the place for payment, and states that the buyer must pay the price to the seller "(a) at the seller’s place of business."[7][page 366]

When the seller and the buyer are far from each other, distance enhances the practical problems of exchanging goods for price. The seller faces greater hazards if the buyer fails to pay after the goods arrive, while the buyer faces added inconvenience if he must inspect the goods before they are shipped.[8] Is the convenience to the buyer so great that it denies him the "opportunity to examine the goods" before payment? If so, it might be argued that Article 58(3), in allowing the buyer to defer payment until it has an opportunity to inspect the goods, modifies the basic rule on the place for payment stated in Article 57(1)(a). However, a buyer who is concerned that the seller might ship defective goods can usually arrange for a commercial inspection agency to act on its behalf in inspecting the goods before they are loaded on the carrier—a step that normally is less onerous than for the seller to redispose of goods that the buyer has wrongfully rejected after they have arrived in his country. These polices have been recognized and reconciled by arrangements that the documents the seller must tender for payment by letter of credit shall include a certificate of quality by an independent inspection agency.[9] As an alternative, the buyer could reasonably demand the opportunity, personally or through an agent, to inspect the goods before they are shipped.

In short, it is possible to satisfy the standards of Article 58 for a mutually safe exchange of the goods and the price in a manner that is consistent with the rule of Article 57(1)(a) on the place for payment.

One must not confuse two very different rules on inspection of the goods. Article 38 (§§249–253, supra) establishes a duty to inspect: "(1) The buyer must examine the goods...within as short a period as is practicable..."—a preface to Article 39 whereby a buyer may lose the right to rely on lack of conformity of the goods by failure to notify the seller within a "reasonable time". (The seller’s need for notice that prompted this requirement is discussed at §255, supra.) In sharp contrast, Article 58(3) gives the buyer a privilege to inspect before payment—a privilege that the buyer may forego without violating any obligation to the seller. True, the extent of any opportunity to inspect is relevant to the time for notifying the seller pursuant to Article 39 but inspecting in connection with payment may not provide adequate opportunity to discover defects in the goods (Arts. 38, 39). See Maskow, B-B Commentary 425.

The numerous steps in the making and performance of such a transaction have been summarized elsewhere (§132.1, supra).[10] For simplicity let us consider only these four steps: (1) Following preliminary correspondence the seller transmits to the buyer a pro forma invoice that, inter alia, describes the goods, the quantity, the price and the date when the goods will be available for shipment. (2) The buyer, through its local bank ("Firstbank") arranges for the issuance of a letter of credit for the price and its confirmation by a bank near the seller ("Secondbank"). (3) The seller ships the goods to the buyer and obtains various documents including a policy of insurance and a bill of lading that calls for delivery of the goods to the "order of Secondbank". (4) The seller present documents, including the invoice, policy of insurance and bill of lading, to Secondbank and receives the price.[page 368]

One will note that these steps need to be taken separately and in the above sequence. Step (1) must precede Step (2) since the letter of credit needs to be written in terms of the description of the transaction provided by the pro forma invoice. Step (2) must precede Step (3) since the seller needs assurance of payment by the letter of credit before shipping the goods to a foreign destination. Step (3) must precede Step (4) since the seller needs the documents that result from shipment (e.g., the bill of lading) to comply with the conditions for payment prescribed in the letter of credit. In sum, a transaction designed for the exchange of the goods and the price calls for a series of separate steps; the concurrent exchange occurs only at Step (4). (In some transactions additional preliminary steps are required.)

As one turns from the facts of the transaction to legal analysis one notes that at each step a party’s duties do not arise until the other party has taken the preceding step. This results simply from the interpretation of the agreement in the light of basic commercial facts; legal rules are available (Arts. 57, 58, 71, 72, 80) but in this concrete setting they speak less eloquently than the internal logic of the parties’ plans for delivery and payment.[11] Indeed, as we have seen in connection with Article 14, 19 and 55 (§§137.4, 170,325.1, supra), in routine transactions that lack a formal "Contract of Sale" the parties may not be bound by contract until the final step when goods are exchanged for the price. However, if the parties are bound by contract and one fails to proceed with the agreed steps for performance the other party has a wide range of remedies—to require performance (Arts. 46, 62), avoid the contract (Arts. 47, 49, 63, 64) and claim damages (Arts. 45(1), 61(1), 74–77)—remedies that are examined more fully elsewhere in this book.[page 369]